Sharp Thinking

No. 148     Perspectives on Developments in the Law from Sharp-Hundley, P.C.      March 2018

Installment Sales Act Provides New Protections For Some Purchasers By Contracts For Deed

By Michael L. Olson, Michael@sharp-hundley.com, 618-242-0200

In newly-enacted legislation that went into effect January 1, 2018, additional protections were added for individuals who purchase their home on an installment sales contract. 

Also known as a contract for deed, an installment sales contract allows the purchaser to obtain financing directly through the seller by delaying the transfer of title until the installment payments are completed. 

For many prospective homebuyers, installment sales contracts offer a convenient and practical alternative to traditional financing through a mortgage loan from a bank.  An installment sales contract allows a buyer to live in a home while paying the purchase price to the seller over a period of time.  This option especially is attractive for buyers who ordinarily may not qualify for a mortgage loan from a bank.                                                                             

Although an installment sales contract to purchase a home may sound like a great alternative to traditional mortgage loans, there are a few downsides that an unscrupulous seller could abuse to the detriment of less sophisticated buyers.  For instance, many installment contracts may include a forfeiture provision that purports to allow the seller, upon the buyer’s default, to sue for possession of the home and retain all previous payments made by the buyer.  In other words, a buyer’s equity in the home may not be protected until the contract has been fully paid off.

As a result, the act institutes a number of new disclosures intended to provide transparency and protection to buyers.  This includes a new disclosure by the Office of the Attorney General providing consumers with information about their rights under installment sales contracts. The act also requires sellers to notify buyers of their right to obtain a third-party inspection or appraisal of the home.  The seller also is required to warrant that the home is not subject to any known building code violations or to condemnation by a local government. 

These disclosures are important because installment contracts typically require the purchasers to pay for any necessary repairs out of their own pocket.  So it is important that buyers ensure that the home they are buying does not contain any violations or defects before purchasing.

In the event the buyer on a contract for deed misses a monthly payment and defaults on the loan obligation, the act now provides that the buyer must be given at least 90 days to cure the default before the seller can bring legal action to recover possession.  Depending on the duration of the contract and the amount of the purchase price paid by the buyer before the default, a seller must initiate proceedings under either the Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-1101 et seq. (“IMFL”) or the Forcible Entry and Detainer Act, 735 ILCS 5/9-101 et seq. (“FEDA”). 

Previously, sellers were required to initiate judicial foreclosure proceedings under the IMFL for any installment contract for residential real estate (i) with a duration in excess of five years, and (ii) where the unpaid amount was less than 80% of the original purchase price.  However, the act amended this section to remove the five year requirement.  This change ensures that even more buyers are afforded the additional protections under the IMFL such as the right of redemption.

In situations where the buyer under an installment sales contract has not paid at least 20% of the of the purchase price, FEDA still applies.  However, in what may be an oversight by the Illinois General Assembly, the act failed to amend the corresponding five year requirement contained in 735 ILCS 5/9-102(a)(5).  Accordingly, there may be some confusion by courts as to whether the IMFL or FEDA applies in situations where the buyer has paid off more than 20% of the purchase price but the contract is for a duration of less than five years.

Despite these changes, the act’s impact on installment sales contracts in Southern Illinois may be limited.  Under the act, a seller is defined as a person who enters into installment sales contracts more than 3 times in a 12-month period.  Thus, individuals selling a single home would not qualify as a seller under the act.  Moreover, the Illinois General Assembly specifically excluded tracts of real estate consisting of four acres or more zoned for agricultural purposes.  This means the sale of farms under an installment contract are not subject to the act.

Because the new protections afforded under the act may not apply to most transactions in Southern Illinois, potential buyers should be cautious when considering entering into a contract for deed.  Many protections afforded to homebuyers under the IMFL are not necessarily applicable to buyers under a contract for a deed.  This is especially true for sales of commercial property, which are not included under the act.

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